Tax considerations toreduce the local taxes by a split of the contracts.
Lump Sum Turn Key Agreement                                   Building                                   Building         ...
Legal Structure Offshore Sub              Local Sub    Chinese Sub  Contractor               Contractor    Contractor     ...
Tax Implications of the Agreement• Tax inefficiencies arising from a single consolidated contract for the entire work and ...
Split of the LSTK agreement                     Local Sub                      Local Sub               German Sub         ...
Umbrella Agreement• Comfort letter of the offshore company to the buyer/employer• Three main functions: ✓to assure that th...
ConsortiumAgreement• Rights and obligations of each member ✓ Allocation of costs, risks, ✓ Internal chargeback• Secondment...
Tax Implications after the Split• Offshore contract (Purchase part should be conducted by the Local company) ✓Profits are ...
Other Implications• Avoidance of local red tape requirements ✓Foreign Business Licenses ✓Business visa and work permit iss...
Resumé: Advantages and downsides• Split of LSTK agreement results in tax savings• Local onshore contractor can be affiliat...
Investing in Thailand• Investing in Thailand - Some- times the water is deeper than it looks.• We are specialized to guide...
The up-to-date and complete presentation isavailable for you as a free download at ✓www.scribd.com/collections/4054603 ✓ww...
PUGNATORIUS Sophisticated solutions in a complex legalenvironment. Serious legal and tax advice in the land of smile• Rech...
www.PUGNATORIUS.co        m
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Lump sum-turn-key

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  • ISHIKAWAJMA-HARIMA HEAVY INDUSTRIES LTD V. DIRECTOR OF INCOME TAX, MUMBAI [2007] RD-SC 8 (4 January 2007)
  • Lump sum-turn-key

    1. 1. Tax considerations toreduce the local taxes by a split of the contracts.
    2. 2. Lump Sum Turn Key Agreement Building Building Delivery of Delivery of Engineering Engineering construction construction components components Erection and Erection and Erection control // Erection control Start-up // initial Start-up initial assembling assembling site supervision site supervision operation operation• Turn key vs. component agreement ✓Test runs successfully completed ✓Interface and timing risks ✓Fit for purpose• FIDIC book master agreements ✓One combined package of contracts ✓Consistent and integrated provisions
    3. 3. Legal Structure Offshore Sub Local Sub Chinese Sub Contractor Contractor Contractor Offshore• Lump Sum Turn Key Prime ✓Engineering Contractor ✓Building construction • Exposes entire ✓Delivery of components contract revenue to ✓Erection & assembling tax ✓Site supervision ✓Start-up & initial op Local Principal
    4. 4. Tax Implications of the Agreement• Tax inefficiencies arising from a single consolidated contract for the entire work and lump sum price ✓Under Local/German DTT sale of goods does not constitute a PE, but in case of combined LSTK service part of the agreement constitutes a PE for the whole scope of deliveries and services. ✓Under Local tax laws no withholding tax on sale, but in case of combined LSTK withholding tax on the full remuneration amount. ✓Withholding tax can be credited against corporation income tax obligations, if any. ✓Tax cash refund in general possible, but request usually causes in aggressive tax audit.• Risk of adjustment, because less comparable data for mixed agreements.• Importance of duration of construction work? 6 months? 12 months?
    5. 5. Split of the LSTK agreement Local Sub Local Sub German Sub German Sub Chinese Sub Chinese Sub Contractor Contractor Contractor Contractor Contractor Contractor PE of offshore contractor? Local Local German German Onshore Onshore Offshore Offshore - Split of the contract Contractor Contractor Contractor Contractor - Split of the contractors - Syndicated offer Onshore contract - Local engineering Offshore contract - Local components - Offshore design - Erection / and engineering assembling - German - Building construction components - Site supervision - Chinese - Start up & initial op components - Onshore spare-parts - Ownership trans- Local Principal Local Principal - Onshore training ferred outside of Onshore - Offshore spare parts
    6. 6. Umbrella Agreement• Comfort letter of the offshore company to the buyer/employer• Three main functions: ✓to assure that the service provider is financial capable to fulfill its obligations, including penalties and damages claims. ✓to assure that buyer/employer has no problem to address the correct contractual partner for claims and information ✓„horizontal defense“, prevent the contractors from relying on the defaults of the other parties to avoid performing their contractual obligations.• No overruling and modification of service contract by cross-default clause or taking over of service responsibility by seller• Umbrella Agreement should qualify as agreement not to be necessarily disclosed to the tax authorities, because it is irrelevant tax-wise
    7. 7. ConsortiumAgreement• Rights and obligations of each member ✓ Allocation of costs, risks, ✓ Internal chargeback• Secondment Agreements ✓ Transfer of employees ✓ Internal costs allocation• Financing agreements ✓ stand-alone conditions ✓ no collateral in project ✓ no reference to project• Procedures
    8. 8. Tax Implications after the Split• Offshore contract (Purchase part should be conducted by the Local company) ✓Profits are taxed abroad, tax authorities will look for Local PE ✓No withholding tax ✓Local tax authorities will try to reclassify offshore services as royalties• Onshore contract (Service should be rendered by the domestic company or branch (PE)) ✓Under the DTA profits are generally taxed outside of Onshore ✓If there is a PE in Onshore, it will be taxed here ✓Withholding tax of 3%, but deductible against profits ✓Stamp duty, if any, reduced to the service part• Remuneration has to be adjusted to arm‘s length principles (transfer pricing)• Problem: Tax effects of the umbrella agreement
    9. 9. Other Implications• Avoidance of local red tape requirements ✓Foreign Business Licenses ✓Business visa and work permit issues• Commercial imperatives not to be compromised ✓No uneconomic shift of burden, risks and costs from seller side ✓Turnkey character from employer side ✓No cross-default• Availability of all concessions and exemptions for each party
    10. 10. Resumé: Advantages and downsides• Split of LSTK agreement results in tax savings• Local onshore contractor can be affiliate to offshore company or its branch.• Split results in risk transfer which has to be compensated by bridge agreement.• Any assistance fees paid from offshore to onshore contractor might be classified as royalties with a withholding tax rate of 15%.• The art of Splitting the Agreement is more than a handcraft• Additional costs by the involvement of Local onshore partner• Non-tax: Offshore contractor does not need Local Business License• Structure is not in-line with FIDIC books.• Structure has to be agreed by both parties. Local principal will not take over the tax risks.
    11. 11. Investing in Thailand• Investing in Thailand - Some- times the water is deeper than it looks.• We are specialized to guide foreign investors through the red-tape requirements, legal hurdles and international tax structuring of their foreign in- vestments, trade operations or other business in Thailand and Southeast Asia.• We can assure the highest professional standards, level of availability and swift completion of challenging and demanding projects.
    12. 12. The up-to-date and complete presentation isavailable for you as a free download at ✓www.scribd.com/collections/4054603 ✓www.pugnatorius.com
    13. 13. PUGNATORIUS Sophisticated solutions in a complex legalenvironment. Serious legal and tax advice in the land of smile• Rechtsanwalt Steuerberater Anwaltskanzlei Anwälte Rechtsanwälte Steueranwalt Steuerrecht Wirtschaftskanzlei Steuerkanzlei Steueranwälte,• Lawyer Attorney Solicitor Attorney-at-law law firm lawfirm Abogado Abogada Avogado tax lawyer, advogado, consultor fiscal, impuesto consultor• Thailand Bangkok Phuket Pattaya Hua Hin Koh Samui Koh Chang, Nonthaburi Pak Kret Tha Khlong, Pathum Thani, Tha Ruea Phra Thaen, Kanchanaburi, Thanya Buri, Pathum Thani, Thung Song, Nakhon Si Thammarat, Trat, Uthai Thani, Uttaradit, Warin Chamrap, Ubon Ratchathani, Yasothon
    14. 14. www.PUGNATORIUS.co m
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